High share prices see investors pick cash over stocks
Conviction in equities… is certainly waning and cash positions are increasing.
EXPENSIVE. That’s the tag plaguing South African stocks and driving investors such as Nedbank Private Wealth and Momentum Asset Management to park their money in cash-like securities to avoid losses.
The all share index was little changed in the second quarter, losing just 0.7 percent. Even so, estimated earnings for the gauge are near a record relative to that of the MSCI emerging markets index.
By contrast, investors in the money market can earn 7.18 percent with a nine-month negotiable certificate of deposit, a tradable receipt guaranteed by the issuing bank that pays back the capital and interest at the end of the term.
High ratios
“We don’t expect a massive increase in earnings over this next year,” Nedbank Private Wealth money manager Gavin Cawse said on Tuesday, predicting an average 12 per- cent increase in South African company profits for this year.
“Earnings have to catch up or the prices have to come down,” he added.
The attraction of cash over stocks shows how President Jacob Zuma’s administration is struggling to revive the economy against a backdrop of power shortages, rising joblessness and an inflation rate that may soon justify the first interest-rate increase in a year. Consumer confidence that dropped to a one-year low in the first quarter and a government seeking to rein in a budget deficit by imposing limits on state spending are also weighing on company profits.
The all share index gained for the first time in four days yesterday, adding 0.18 percent to close at 51 888.04 on the JSE.
The measure fell by about 5.8 percent since reaching a record on April 24 to trade at almost 17 times estimated earnings. The MSCI emerging markets index gained 0.3 percent on the day for a forward price:earnings ratio of 12.6.
Cash positions
Momentum Asset Management money manager Wayne McCurrie said it sold shares in May and raised cash positions.
“We’re very conservative,” he said. “We don’t have to sell anymore, we’ve already done the selling so now we’re just going to sit.”
Aveng, South Africa’s biggest construction company by sales, was the largest loser in the second quarter, sliding 49 percent to the lowest since 1999 as full-year profit more than halved. Illovo Sugar dropped 40 percent to trade near a nine-year low as a drought weighed on earnings. Arcelor-Mittal South Africa, Africa’s biggest maker of steel, is down 36 percent, while Hulamin, the country’s biggest aluminum-product maker, has lost 28 percent.
“The market overall has underperformed cash,” Cawse said. “From our side we’re quite cautious of buying in this market, and, if we’re looking, its very stock specific.”
His top picks include SAB-Miller, the world’s secondbiggest brewer, Richemont, the world’s second-largest maker of luxury goods, Remgro, a South African investment company controlled by billionaire Johann Rupert, and Standard Bank Group, Africa’s biggest lender by assets.
“Conviction in equities, especially local South African ones, is certainly waning and cash positions are increasing,” said Glenn Silverman, the chief investment officer at Investment Solutions. “In some cases, managers feel that South African cash could even outperform South African bonds and equities.”